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Apex Court rules against illegal transfer of lease through transfer of shares

In the case of State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt. Ltd., the Supreme Court ruled on the established principle of lifting of corporate veil. Gotan Limestone Khanji Udhyog (GKLU) was a partnership firm with a mining lease from the Government, which it transferred to a private limited company Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL). GLKUPL was incorporated through conversion of the partnership firm into a private limited company. The partners became the directors of the company, and GLKUPL sought permission to transfer mining lease stating that the incorporation was a mere change of form of its own business by converting itself from a partnership firm into a private limited company and the transfer of the lease from the firm to the company did not involve any consideration. After obtaining permission to transfer lease from the concerned authority,the shareholders of GLKUPL sold all of their shares in the company to a subsidiary of Ultra Tech Cement Company Limited (UTCL) for INR 160 crores. This meant that GLKUPL effectively sold the mining lease to UTCL, in the disguise of a transfer of shareholding. The Government of Rajasthan challenged the transaction before the Rajasthan High.

The division bench of the High Court upheld the transactions on the ground that the company is a separate legal personality and that a transfer of shares among shareholders does not mean transfer of the mining lease since the lease remains with the transferred company.

On appeal before the Supreme Court, the Supreme Court quashed the transaction by lifting the corporate veil of GLKUPL. The Court noted that in the present case there are two transactions. In first transaction of transfer of lease from the firm to the company, with the permission of the competent authority, only disclosure made while seeking permission for transfer is of transforming partnership business into a private limited company with same partners as directors without there being any financial consideration for the transfer and without there being any third party. In the second transaction, the entire shareholding is transferred for share price and control of mining lease is acquired by the holding company without any apparent price for lease.

The Court reiterated the doctrine of public trust in relation to the largesse and held that the lessee privately and unauthorizedly cannot sell its rights for consideration and profits from rights belong to State as it is an illegal transfer.

Technically lease rights are not sold, only shares are sold. No permission for transfer of lease hold rights may be required. However, the court observed that the declaration that no consideration was received which though apparently correct was actually false as the subsequent transaction of sale of shares was integral part of the first transaction of transfer of lease to private company, which soon thereafter became subsidiary of another company. The real transaction is sale of the mining lease for consideration without the previous consent of competent authority, as statutorily required. In view thereof, the Court opined that the partnership firm holding lease hold rights has successfully transferred the said rights to a third party for consideration in the form of share price which is nothing but price for sale of mining lease which is not allowed and for which no permission has been granted and which is patently illegal.

The view expressed by the Apex Court is a reiteration of the rule laid down in the case of Fox v. Bishop of Chester. (1824) 2 B 7C 635, where in the Court ruled that to carry out effectually the object of a statute, it must be considered as to defeat all attempts to do, or avoid doing in an indirect or circuitous manner that which it has prohibited or enjoined. In other words, anything which cannot be done directly cannot be done indirectly.

The doctrine of public trust mandates that a private person shall not benefit at the expense of public property. The State has to exercise its power of granting or refusing permission for exploitation of largesse in a fair and reasonable manner following doctrine of public trust. By lifting the corporate veil, the Supreme Court endorsed the pragmatic approach over the pedantic approach, of giving weight to substance over form.

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